Earnings Call
Old National Bancorp /In/ (ONB)
Earnings Call Transcript - ONB Q2 2020
Operator, Operator
Welcome to the Old National Bancorp Second Quarter 2020 Earnings Conference Call. This call is being recorded and has been made accessible to the public in accordance with the SEC’s Regulation FD. Corresponding presentation slides can be found on the Investor Relations page at oldnational.com and will be archived there for 12 months. Before turning the call over, management would like to remind everyone that as noted on Slide 2, certain statements on today’s call may be forward-looking in nature and are subject to certain risks, uncertainties and other factors that could cause actual results to differ from those discussed. The company’s risk factors are fully disclosed and discussed within its SEC filings. In addition, certain slides contain non-GAAP measures, which management believes provide more appropriate comparisons. These non-GAAP measures are intended to assist investors in understanding performance trends. Reconciliation for these numbers is contained within the appendix of the presentation. I would now like to turn the conference over to Jim Ryan for opening remarks. Mr. Ryan?
Jim Ryan, CEO
Thank you, Dorothy. Good morning. I hope this call finds you and your families safe and healthy. We are pleased with our second quarter results and the ongoing implementation of the ONB Way strategic initiatives, including our recent announcement regarding our technology partnership with Infosys. We have begun our transition to return to the workplace, including reopening our lobbies and bringing our key team members back to the office, but admittedly we are slowing down our transitions as the number of positive cases is increasing across our footprint. Our lobbies remain open, and we are committed and focused on the health and safety of our team members, clients, and communities. I would also like to thank our team members for their hard work and dedication in serving our clients and communities in this challenging environment. Starting with Slide 3, our second quarter net income was $51.7 million, including $3.7 million in after-tax ONB Way charges. Adjusted net income was higher at $55.1 million, which includes $22.5 million in provision for expected credit losses and $2.1 million in provision for unfunded commitments. These provisions are consistent with the most recent Moody's economic forecast. Brendon will fill you in on all the details. End of period total loans increased by $1.3 billion, primarily due to PPP loan funding and commercial real estate growth. Our commercial production, excluding PPP loan production, was $658 million, slightly higher than the first quarter. Line utilization dropped to 26% due to line payoffs and an increase in new unused lines of credit. Core deposit growth of $1.9 billion, funded by PPP proceeds and higher savings rates, were bright spots. Net interest income was higher from PPP income, which offset the impact of lower interest rates. Mortgage and capital markets revenue continued to be exceptionally strong and offset COVID-related lower deposit service charges and interchange income. We continue to achieve lower expenses as we execute on the ONB Way initiatives. Our adjusted efficiency ratio for the quarter was under 54%. Year-over-year operating leverage improved by almost 600 basis points. Our credit quality metrics improved during the quarter, but we expect that losses will ultimately materialize once the stimulus and deferral programs run their course. We still don’t completely appreciate the depth of the crisis, but we believe our historically strong underwriting practices, diverse and larger loan portfolios, and Midwest footprint should help us weather the impact better than most. We continue to share with our Board of Directors multiple economic forecasts and various stress tests, and as a result, we don’t anticipate any other capital actions and we expect to maintain our current dividend. We are still open for business and we are extending new credit. We manage for the long-term. Our balance sheet and capital markets are strong. Our markets are diverse and our experienced team will help us manage through this challenging time. I am confident that we will emerge even stronger on the other side. Moving to Slide 4, I want to update you on our recently announced technology partnership with Infosys. As a part of the ONB Way, we hired outside experts to help us examine our current technology infrastructure, investments, and talent. The technology investments required for financial services are only accelerating, and we recognize the need for a strong partner to help us maximize the benefits from those increased investments. This multiyear technology partnership will fund those accelerated investments in technology infrastructure, improve our training and development opportunities, and increase our innovation. We are confident that over time, this partnership will significantly enhance our client experiences and provide even greater scale to grow our bank efficiently and effectively. Not only is Infosys the leading global information technology company, but they are also making a $245 million investment in the state of Indiana, with plans to hire 3,000 workers and build their U.S. training center in Indianapolis.
Daryl Moore, CFO
Thank you, Jim. I will begin my portion of this morning's presentation on the top half of Slide 5, where we lay out our exposure to what we believe will be the most vulnerable segments of our commercial portfolio. Regarding the particular industries noted, you can see that none of the six identified vulnerable segments exceeds 2.3% of the total loans, and the total exposure of all these identified segments is just 7% of total loans. We believe that a critical factor determining the staying power of our borrowers in this very challenging economic environment is not only the level of capital each of these borrowers brought into this downturn but also their ability to raise additional capital if needed. In that regard, to the extent that they are forgiven, PPP loans represent outside equity contributions to our borrowers, especially concerning these vulnerable industries. We imagine that these capital injections are going to be instrumental in assisting our borrowers in navigating through the current crisis. Therefore, correcting our assessment of the criticality of having access to outside capital sources, it is interesting to note that we have approved over $203 million in PPP loans to borrowers in these six vulnerable industry segments, which represented just shy of 25% of the total pre-PPP loans outstanding in these industries. We continue to work through the portfolio to rate our borrowers on their pre-COVID strength in the areas of liquidity, capital, the ability to service debt obligations, and loan structure as a baseline for understanding how the current pandemic could impact those borrowers. As we begin to receive interim financial results from our borrowers, we will use that information to further inform our understanding of the underlying strengths or weaknesses in each individual relationship and take actions as appropriate. With respect to the retail side of the loan portfolio, the chart at the bottom of Slide 5 provides some information around retail product exposures and a proxy of credit quality based on average FICO scores. Delinquencies and losses in these portfolios as a whole are performing better than they did during the first half of last year, but we are very guarded in our view of those trends given the number of payment deferrals granted and the fact that we have had a moratorium on most repossessions for four months. Moving to Slide 6, we provide more information on deferrals showing that we have booked deferrals on 14% of our commercial book and roughly 3% on each of the consumer and residential mortgage portfolios, equating to an 11% deferral rate on the entire portfolio. First-time deferral requests have slowed to a trickle, and we are just now beginning to consider requests for extensions of any first-round 90-day deferrals. To the extent of requesting deferral period extensions, we will have the opportunity to spend a bit more time analyzing those requests than we did on the front end and will use the baseline information on liquidity, capital, debt serviceability, and loan structure that I mentioned earlier to ensure that we use this window of opportunity to strengthen credits where we can in consideration of any further concessions. Moving to the bottom half of Slide 6, we're pleased to report that we have extended in excess of $1.5 billion in Paycheck Protection Program loans to over 9,200 borrowers. If you can see from the chart, almost 80% of the loans extended were to entities or individuals with PPP loan sizes falling in the $150,000 or less category, affirming our position as a large bank with a community focus. There has been a team of individuals that have spent significant hours building up the forgiveness process for these loans, which will be ready to be utilized by our clients once the SBA is open to receiving those requests. On Slide 7, we provide an overview of credit quality metrics. 30+ day delinquencies stand at 17 basis points, relative to levels not seen for at least 20 years in this organization. As I mentioned earlier, it is critically important to keep in mind that borrower systems in the form of PPP loans, payment deferrals, and SBA loan payment supplements have certainly helped to dampen any increase in delinquencies we might have seen absent this assistance. It is yet to be seen what impact any wind down of these programs might have on delinquency rates going forward. Net charge-offs for the quarter fell to more historically normal levels. Net charge-offs during the period were slightly more than $0.5 million, or 2 basis points of average loans. Non-performing loans fell by 12 basis points in the quarter, in small part due to a slight decline in non-performing balances, but mostly as a result of increased loan balances associated with Paycheck Protection Program loans. In the final section of this Slide 7, we look at the historical relationship of net charge-offs to non-performing loans. While there is a somewhat increasing trend due to higher fourth-quarter 2019 and first-quarter 2020 losses, you can see the significant difference between Old National and our peers when it comes to this particular metric. With that, I'll turn the call over to Brendon.
Brendon Falconer, Chief Accounting Officer
Thank you, Daryl. Before turning to the quarterly financials, we would like to provide an overview of our allowance for credit losses. Our CECL model assumptions were again derived from the Moody's baseline forecast, which is now projecting higher prolonged unemployment and a sharper initial decline in GDP compared to our first quarter assumption. This updated economic outlook is the primary driver of the $22 million reserve increase this quarter. Our current allowance for credit losses to loan ratio, including PPP loans, stands at 94 basis points. Excluding PPP loans, our allowance to loan ratio would be 105 basis points. I would also like to remind you that we continue to carry $62 million in unamortized credit marks from our acquired portfolio, in addition to the allowance held on these loans. While these marks will not directly offset charge-offs, any remaining mark will accrete through margin on resolution. The fiscal stimulus and relief programs have been effective in mitigating credit losses in the near term. However, there is still a great deal of uncertainty regarding the cap on the virus, future government actions, and the long-term health of the economy, all of which could impact future reserve needs. That said, our reserve levels reflect the current economic outlook and are our best estimate of the credit losses in the portfolio today. Turning to the quarter on Slide 9, our GAAP earnings per share was $0.32, and our adjusted earnings per share was $0.33. Adjusted earnings per share exclude $4.9 million in ONB Way-related charges. Moving to Slide 10, we are pleased with our quarterly adjusted pretax, pre-provision net revenue, which was 7.6% higher year-over-year and 90% higher over the prior quarter. This improvement was driven by increased fee income led by our mortgage and capital markets businesses, as well as a reduction in adjusted operating expenses resulting from good execution of the ONB Way initiative. Despite the challenging interest rate environment, we improved operating leverage by 576 basis points year-over-year. Slide 11 shows the trend in outstanding loans and earnings asset mix. End of period loans increased by $1.3 billion quarter-over-quarter due to $1.5 billion in PPP loans. Commercial real estate loans grew at a 9% annualized rate, while C&I loans excluding PPP were down $201 million due to increases in revolving line utilization. Commercial activity continued to be strong, with total production excluding PPP at $658 million and an end-of-period pipeline totaling $2.7 billion. Loan yields, excluding PPP, were 3.96% for the quarter, reflecting the full impact of the decline in short-term rates, coupled with lower new business rates, which averaged 3.09%. The net portfolio yield was down 8 basis points quarter-over-quarter to 2.63%, with new purchases yielding 1.56%. Moving to Slide 12, for the period, average deposits increased during the quarter as a significant amount of PPP loan funds were deposited and remained on the books at quarter end. This also benefited from a broad increase in savings rates, as well as seasonal increases in public bonds. Our total cost of deposits declined from 34 basis points in the first quarter to a low 17 basis points in Q2. While we continue to look for opportunities to reduce funding costs, most of our planned rate actions are now complete. Deposit costs fell 24 basis points to 1.1%, and we expect this trend to continue for several quarters as the majority of our CD book reprices within the next 12 months. Overall, we are pleased with the results of our deposit pricing strategy, which has resulted in a meaningful reduction in deposit costs while maintaining our core client base. Next on Slide 13, you will see the detailed changes in our second quarter net interest income and corresponding margin. Net interest margin declined 17 basis points quarter-over-quarter and was generally in line with our expectations. PPP loans contributed approximately $7 million to net interest income but had a negative 5 basis point impact on interest margin. Excluding the impact of both PPP loans and accretion, net interest margin was 3.07% compared to 3.16% in Q1. The reduction in core earning asset yields, which were down 22 basis points, was only partially offset by a 13 basis point reduction in funding costs. This trend in our margin will likely continue as our earning assets reprice in this lower long-term rate environment. Slide 14 shows trends in adjusted non-interest income. Our second quarter adjusted non-interest income was $58 million, representing a $6 million increase over the prior quarter. The primary driver of this improvement came from our mortgage business. Mortgage revenue was $17 million in Q2, which represents a $6 million increase over the prior quarter and a $10 million increase over Q2 2019. Mortgage production was a record $656 million, with 34% coming from the purchase category. The pipeline also remained a strong $567 million heading into the third quarter. Please note we did take an $800,000 impairment charge to our MSR portfolio in Q2 that was netted against our mortgage revenue. The capital market line of business remains a bright spot, as interest rate swaps continue to be very attractive to clients. Our wealth business benefited from seasonal tax credits this quarter. The lower equity market value did have a modest negative impact on both investment and trust revenues. As expected, bank fees were down $3 million compared to the prior quarter, driven by significant decreases in overdraft presenters. Interchange income also came under pressure in Q2, but it rebounded nicely from its mid-quarter downturn and slowly returned to normal with local accounting reopening. Next, Slide 15 shows the trend in adjusted non-interest expenses, which reflect our ongoing focus on expense management. ONB Way charges were $4.9 million this quarter, which is slightly better than the $6 million we projected. Adjusting for these ONB Way charges and tax credit amortization, non-interest expense was down $7 million quarter-over-quarter. Our ONB Way expense initiatives have resulted in a 16% year-over-year reduction in branches and an 11% year-over-year reduction in FTEs. It’s also worth noting that our second quarter non-interest expenses included an increase in our allowance for unfunded commitments of $2.1 million. Our adjusted efficiency ratio for the quarter was a low 53.8%, representing a 552 basis point improvement from Q1. As I wrap up my discussion on the quarter, here are some key takeaways. We are pleased with our overall performance as the fundamentals of our core business remain strong. Commercial production was solid. Our fee businesses continued to perform well, particularly our mortgage and capital markets lines, and we delivered on the promised expense savings we outlined in our ONB Way strategic plan. Slide 16 includes thoughts on our outlook for the remainder of 2020. We ended the quarter with a healthy $2.7 billion commercial pipeline, but economic uncertainty may impact pull-through rates and loan growth in the near-term. The impact of our net interest margins at the short end of the curve is now largely behind us, but historically, long-term rates will continue to put pressure on asset yields as our loan and investment portfolios reprice to lower coupons. Lending costs will move marginally lower as borrowing and CDs reprice at maturity, but we do not expect this will be sufficient to offset declines in asset yields. PPP loans will also impact our margin going forward. These loans carry a 1% coupon and an average fee of approximately 3%. They will continue to be accretive through margin on a level yield over their two-year terms. As loans are forgiven, any remaining fee will be accretive to income immediately. The timing of loan forgiveness is still uncertain, but we don't expect significant payoff to begin until late this year. Several key items will also likely come under pressure from the economic slowdown. Our wealth management and investment businesses have seen a decline in the valuation of our assets under management, which will impact revenue in the near term. Overdraft fees were down sharply in the quarter and may take some time to recover to pre-crisis levels. The mortgage market has proven more resilient than we expected but will still be subject to the typical seasonal declines in the back half of the year. We are slightly ahead of our planned 2020 ONB Way expense initiatives and have now realized a large portion of the savings promised this year. The Infosys partnership is expected to generate approximately $5 million in one-time charges associated with upgrading our IT infrastructure, which will be recognized over the next several quarters. We would also like to give you an update on our current capital position and outlook. We accreted an additional 30 basis points of capital, ending the quarter at a healthy 11.7%. I would also reiterate that based on current capital levels and our outlook on earnings, we believe we will continue to out-earn our dividend. We've also recently updated our stress test model, and under the CCAR severely adverse scenario, we remain well-capitalized at the lowest point in the nine-quarter horizon. Our liquidity position also remains very strong, with our low loan to deposit ratio of 84%, strong cash and unencumbered security position, and various sources of liquidity. We have plenty of flexibility to respond to future funding needs. Lastly, we have provided some guidance on our full year 2020 tax rate, which is expected to be approximately 20.5% on an FTE basis and 16% on a GAAP basis. As we previously reported, project delays caused by COVID-19 have impacted the timing of our other historic tax credit projects that we anticipated will be completed this year. Those projects have recently restarted, and barring additional delays, they could be placed in service by year-end. If projects are completed in Q4, we will take the full tax credit amortization and corresponding tax benefit in that quarter.
Jim Ryan, CEO
With that, we're happy to answer any questions that you may have, and we do have the full team here, including Jim Sandgren.
Operator, Operator
Your first question comes from the line of Scott Siefers with Piper Sandler.
Scott Siefers, Analyst
Hey, good morning. Hope you guys are doing well and I appreciate you taking the question. I just wanted to ask one question on the reserve. I mean, the credit numbers are excellent, of course, and you guys have such a solid history, but you know the only area where Old National looks light is just on the reserve to loan ratio. I feel like I know you guys well enough to understand the nuance. But just any thoughts you might have had to perhaps say ramping up the qualitative reserve just given the uncertainty in the outlook or sort of what were the factors that got you to this as the appropriate level?
Daryl Moore, CFO
Sure. So obviously Scott, we build our models based on historical results and run the Moody's baseline forecast through, trusting that the models are accurate and appropriate given the economic outlook. I will say that we also did add some additional qualitative reserve to the model this year, but we feel really comfortable with where our reserve levels stand given the economic forecast that Moody's provided.
Jim Ryan, CEO
Scott, you know, it's hard to know exactly what the right answer is in this kind of environment, and we think we've provided an appropriate amount given our history of our portfolio and the granular nature of the portfolio, the diverse nature of the portfolio, so the board and management are very comfortable with where our reserve stands today.
Scott Siefers, Analyst
Okay, perfect. I appreciate that color. And then Brendon, just maybe, I think, since none of us has really gone through a credit cycle with sort of credit marks the way they are, your guide is $62 million credit mark. To what extent is that indeed available to absorb loss? I think you touched on it in your prep remarks, but just any additional color you could add would be great?
Brendon Falconer, Chief Accounting Officer
Yes, the accounting won't allow you to specifically offset a charge off, but those credit marks are on the books and will accrete through earnings, and are available to help fund provisions in the event we need it as we go forward. And if the loan is resolved, if the loan is charged off, we will accrete that credit mark straight to earnings in that period, although the geography will be different.
Scott Siefers, Analyst
Yes, got it. All right, perfect. Thank you guys very much.
Jim Ryan, CEO
Thanks, Scott.
Operator, Operator
Your next question comes from the line of Chris McGratty with KBW.
Jim Ryan, CEO
Good morning, Chris.
Christopher McGratty, Analyst
Hey, good morning, everybody. Brendon, if I could start with you on the PPP program, just looking for a couple of numbers and then a couple of outlook questions. I think you said in your prepared remarks 3% average fee. What's the total? What's the total fees that are yet to be realized aside from the 1%?
Brendon Falconer, Chief Accounting Officer
So it's just shy of $44 million left to be accreted, taking about $3.4 million.
Christopher McGratty, Analyst
Okay, and so, and the average balance of the PPP loans in the quarter, do you have that?
Brendon Falconer, Chief Accounting Officer
The average balances, I don't have that – oh average for the balance of the current portfolio? 1.1 billion, sorry I forgot the average loans...
Christopher McGratty, Analyst
So if I think of the roughly I think you said $6 million in the quarter of total revenues from the PPP, most of that would be the 1%. What do you, I guess, how do we think about the cadence of that 44?
Brendon Falconer, Chief Accounting Officer
Yes, the $6.6 million that we took in the quarter was roughly split between fees and coupon, and we'd love to get as much of this into 2020 as we can. Jim Sandgren has a process to be proactive with our borrowers. I think they're anxious to get this behind them as well, but until the SBA gives us a way to submit these, we’re all a little uncertain. Obviously, there's an extension to the time to allocate eligible expenses, and so we're not sure, but our best thought is that this is more of a fourth quarter and beyond income event.
Christopher McGratty, Analyst
Okay. And then last question on the PPP, the deposits that are associated with it, can you just speak to the trajectory of the stickiness of those deposits and do we assume as the loans run down, kind of a one-for-one or how are you viewing those surge in deposits?
Jim Sandgren, CRO
Yes, Chris, this is Jim. It's hard to say, but I would assume certainly in the quarter that you'll start to see some of those balances run down as they're being used for the reasons they've been provided. So I - hard to say one-on-one, but I should think we’ve started seeing those balances reduce in the quarter.
Christopher McGratty, Analyst
Okay, and then my last one, I'll jump out. Brendon, you’ve talked about the margin just the long end being just, the environment being not great for the group. If I take that the core, core margin, I think it was around nine basis points of compression. Do we assume a lesser degree of pressure because of the, because we've now felt the short end or is it? Are you messaging that we should see similar pressure in the back half of the year and the quarter?
Jim Ryan, CEO
Yes, I think for the in the near term, next several - next couple of quarters, I think a similar trend downward is probably appropriate, but then it will begin to flatten from there, but the longer this curve exists, I think we will continue to see some pressure for some time going forward. And Chris, maybe just one other point to your prior question. The buildup in deposits associated with PPP was roughly half of the $1.9 billion increase came from PPP.
Christopher McGratty, Analyst
Okay, that's helpful. Thanks a lot.
Operator, Operator
Your next question comes from the line of Terry McEvoy with Stephens.
Jim Ryan, CEO
Good morning, Terry.
Terry McEvoy, Analyst
Maybe start with a question on Slide 5, the vulnerable industries as you guys describe them changed from the first quarter to the second quarter, a few kind of came out and a few new ones were put in like, like CRE kind of senior housing. Could you just talk about over the last three months, how you've looked at those loan portfolios and why you made the decision to say remove transportation and add senior housing?
Daryl Moore, CFO
Yes, Terry, this is Daryl. The transportation segment, we put that on because right out of the box, there seemed to be a lot of talk about transportation. As we went back and looked at our portfolio, most of that transportation exposure is in hauling either short-term hauling or load hauling within an individual region. So we just didn’t see much deterioration there. As we pulled that out, we also looked at our senior housing portfolio, which was showing just a little bit of weakness before the COVID crisis, and so we thought, if you think about that particular industry, it’s difficult to bring new clients into assisted living just because of COVID. There have been lots of different protocols. They were struggling with finding employees before the crisis. It’s just difficult to increase costs associated with this industry. So we thought, you know what, we just really need to keep our eyes on that. And so we thought it was more appropriate to swap those two out, just to give you a better picture of where our vulnerabilities might be going forward.
Brendon Falconer, Chief Accounting Officer
Terry, I'd tell you, the entire leadership team goes through these portfolios credit by credit, looking at the current disposition, any potential future downgrades, and so there has been an awful lot of time focused in on it, and feels good, as good as we can today about those credits. But we do spend an awful lot of time ensuring that we’re managing this portfolio appropriately.
Terry McEvoy, Analyst
Thanks. And then as a follow up, maybe, I mean, we’re seeing weakness in service charges and interchange revenue just across the industry. Anyway, you could put some numbers behind maybe when and how much it bottomed out with the recovery through kind of the second quarter as it progressed and what your thoughts are now that there’s been some kind of taking some steps back on the opening and some closures in some of your core markets and what that could mean to this fee line?
Brendon Falconer, Chief Accounting Officer
Hey Terry, this is Brendon. I can help you with the service charges. So overdrafts really drove most of our service charge decline. We have not seen any meaningful rebound. It’s been down and has remained down and that’s approximately $2 million for that shortfall we felt in Q1 to Q2, and we don’t expect that to change. As far as interchange income is probably, about half a million dollars worth of headwind in Q2, but that has rebounded back to fairly normal levels. So I don’t think that will be a concern going forward for us.
Daryl Moore, CFO
I think the service charges obviously are being impacted by the stimulus programs and the extended benefits. To the extent that those continue into the future, you’ll probably still see that line item under pressure. But to the extent that they start winding down, I think it might be a return to normal.
Terry McEvoy, Analyst
Great. Thanks, everyone.
Daryl Moore, CFO
Thanks Terry.
Operator, Operator
Your next question comes from the line of Jon Arfstrom with RBC capital markets.
Daryl Moore, CFO
Good morning, Jon.
Jon Arfstrom, Analyst
Hey, good morning. Daryl, maybe a question for you on Slide 6. You’ve talked about second round of deferral discussions just starting to occur. Give us an idea of what you’re thinking in terms of what this slide might look like, a quarter from now? I know, you said that the activity has slowed pretty dramatically, but talk a little bit about what you’re seeing in terms of the flow coming in for a second round?
Daryl Moore, CFO
Yes, Jon, great question. If you recall from last call, we basically split about 50-50 on deferrals greater than 90 days and deferrals less than 90 days. We’ve got about half of the deferrals that are coming back in, and it is a little slower than I had thought maybe on the front end, although I don’t know that I would extend that thinking to the fact that maybe a lot of those 90 days don’t ask for extensions. So it’s yet to be seen there. I think new extension or new deferral requests, based upon the last 30 or 60 days, I just don’t think we’re going to see significantly higher requests. So I don’t know that you’re going to see higher percentages of these portfolios than what we have now. If that answers your question?
Brendon Falconer, Chief Accounting Officer
Jon, I would also add that as we’ve gone through these, we’ve seen many of these early requests were planning for the worst-case scenario regarding rent collection, whether that be commercial or individual rents, and we’re – if you go through these loans one by one, we’re hearing pretty positive things about their ability. So, I’m hopeful that as we go through these renewals or as these maturities come up, that we’ll revert back to normal cases with our borrowers.
Jon Arfstrom, Analyst
And then another challenging question, I guess as well, but that kind of alluded to it earlier. In terms of the reserves and provision outlook, are you saying that your reserves today reflect some of the individual stresses that you’re seeing in the portfolio as well? Or is it just more of using the Moody’s overlay and making some modest adjustments to that, so it’s more of a macro approach? That makes sense is it macro or loan by loan?
Brendon Falconer, Chief Accounting Officer
So we certainly are using the Moody’s as the macroeconomic factor overlay, but we use all of our individual asset quality ratings, loan-to-value ratios, and all the individual borrower characteristics, which generally have shown very strong migration patterns even through this crisis. So we are using granular loan portfolio data in our assumptions.
Jon Arfstrom, Analyst
Okay, so chance the provision backs off a bit if a lot of those Moody’s numbers come in on the optimistic side?
Brendon Falconer, Chief Accounting Officer
If the Moody’s scenario plays out, I don’t think we’ll see a meaningful reduction in reserves, but it should prove that the reserve is adequate to the losses in our portfolio.
Jon Arfstrom, Analyst
And then, I guess one more in a positive way, the pipeline hanging in there. Curious on the dynamics and the drivers of that. We’re all obviously focused on credit, but just curious on the new business pipeline, that one kind of picked my attention.
Jim Ryan, CEO
Yes, Jon, this is Jim. I will take that one. Really encouraged by the size of the pipeline, but maybe more encouraged by the category. The accepted category, which traditionally we did 90% - 95% of those loans across the finish line, has stayed stable quarter-over-quarter, where we did see some growth in the pipeline in the proposal stage. Anecdotal feedback from our borrowers through our commercial sector indicates that folks have a little bit more clarity and they’re optimistic for the second half of the year. Our pull-through rates were down a little bit and certainly in the second quarter. So we’ll see if projects continue, but people are discussing acquisitions and still talking about some growth. So we’ll see. We're very encouraged about what could happen in the third quarter. But we’ll have to just wait and see how things play out. The pipeline is pretty well split between commercial real estate and C&I.
Brendon Falconer, Chief Accounting Officer
Jon, I’d also add that all three segment leaders have been really focused on what they can do to help our clients and what we can do to continue to grow each one of those businesses. So while the second quarter, early parts of the second quarter, we’re probably distracted with PPP production and initiatives, we're really focusing on coming back and working hard, making sure we’re serving our clients and looking for opportunities to grow each of those segments.
Jon Arfstrom, Analyst
Alright, thank you.
Operator, Operator
Your next question comes from the line of David Long with Raymond James.
Jim Ryan, CEO
Good morning, David.
David Long, Analyst
Good morning, everyone. Thanks for taking my call. As it relates to the PPP, the duration of those loans, are you amortizing the fees assuming you don’t get forgiveness over two years, or do you have some that are in the five-year category?
Jim Ryan, CEO
We are amortizing these all over the two years, not over five years.
David Long, Analyst
Got it. Got it, thank you. And then the overall deposit trends, if I can get a little bit more color there, obviously, the PPP may be a little bit of a headwind, the public funds, maybe a little bit of a headwind here in the third quarter. Can you grow deposits in the third quarter? Maybe just talk about broader trends?
Jim Ryan, CEO
I think the trends will be fairly stable compared to what you’ve seen in the past. We just saw increased savings rates across every category, every product type—business, personal, and public—in the quarter. As Jim alluded to in these comments earlier, as stimulus payments sort of draw down and PPP funds get forgiven and redeployed, we’ll start to see that come down, and then it will probably return back to normal deposit trend growth.
David Long, Analyst
Got it? Thanks for taking my questions.
Operator, Operator
And there are no further questions at this time.
Jim Ryan, CEO
Great. Well, we appreciate you all joining us today. We hope you have a great day. As usual, we are available for any follow-ups. Please don’t hesitate to reach out. Thank you very much.
Operator, Operator
This concludes Old National’s call. Once again, a replay along with the presentation slides will be available for 12 months on the investor relations page of Old National’s website at oldnational.com. A replay of the call will also be available by dialing 1-855-859-2056, conference ID code 7973414. This replay will be available through August 2. If anyone has any additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation in today’s conference call.